Lument Finance Trust Q1 2024 Earnings Report

Lument Finance Trust EPS Results

• Actual EPS: $1.50
• Consensus EPS: $1.30
• Beat/Miss: Beat by +$0.20
• One Year Ago EPS: N/A

Lument Finance Trust Revenue Results

• Actual Revenue: $33.71 million
• Expected Revenue: $10.56 million
• Beat/Miss: Beat by +$23.15 million
• YoY Revenue Growth: N/A

Lument Finance Trust Announcement Details

• Quarter: Q1 2024
• Date: 5/9/2024
• Time: After Market Closes
• Conference Call Date: Friday, May 10, 2024
• Conference Call Time: 8:30AM ET

Lument Finance Trust (NYSE:LFT) (NYSE:LFT) is a real estate investment trust focused primarily on commercial real estate debt investments. The company generally targets loans and other credit investments secured by income-producing properties, with an emphasis on the multifamily housing sector.

Its investment activities may include transitional multifamily mortgage loans, commercial mortgage-backed securities and other real estate-related debt instruments. Through its relationship with the Lument platform, the company seeks to identify, underwrite and manage investments in commercial properties across the United States.

Lument Finance Trust was formerly known as Hunt Companies Finance Trust, Inc. and adopted its current name in 2020. The company is externally managed by Lument Investment Management, LLC, an affiliate of the Lument real estate finance platform. James F. Flynn has served as the company’s president and chief executive officer.

Lument Finance Trust Q1 2024 Earnings Call Transcript

Key Takeaways

• Lumen Finance Trust reported GAAP net income of $0.11 and distributable earnings of $0.15 per share for Q1 2024 and declared a $0.07 dividend per share.
• The portfolio’s credit quality remained strong, resolving two risk-rated 5 loans with no additional reserves and maintaining a stable weighted average risk rating of 3.5, with 77% of loans rated A3 or better.
• Unrestricted cash increased to $65 million from $51 million, enhancing liquidity to manage assets proactively and pursue new opportunities outside existing securitizations.
• Multifamily lending volumes fell 7% year-over-year and 29% quarter-over-quarter amid sustained high interest rates, limiting refinancing and acquisition activity despite over $500 billion of maturing debt due by end-2025.
• No new loans were funded in Q1 due to fully deployed capital structures, though management expects to deploy excess cash as financing capacity becomes available.

Presentation

[Operator]

Good morning and thank you for joining the Lument Finance Trust First Quarter 2024 Earnings Call. Today's call is being recorded and will be made available via webcast on the company's website. I would now like to turn the call over to Andrew Tsang with Investor Relations at Lument Investment Management. Please go ahead.

[Andrew Tsang, Head of Investor Relations at Lument Investment Management]

Good morning, everyone, and thank you for joining our call to discuss Lument Finance Trust first quarter 2024 financial results. With me on the call today are Jim Flynn, our CEO; Jim Briggs, our CFO; Jim Henson, our President; and Zach Halpern, our Managing Director of Portfolio Management. On Thursday, May 9, we filed the 10-Q with the SEC and issued a press release to provide details on our first quarter results. We also provided a supplemental earnings presentation, which can be found on our website.

[Andrew Tsang, Head of Investor Relations at Lument Investment Management]

Before handing the call over to Jim Flynn, I'd like to remind everyone that certain statements made during the course of the call are not based on historical information and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

[Andrew Tsang, Head of Investor Relations at Lument Investment Management]

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statement. These results and uncertainties are discussed in the company's filings reported with the SEC, in particular the risk factors section Form 10-K. It is not possible to predict or identify all such risks, and listeners are cautioned not to place undue reliance on these forward-looking statements.

[Andrew Tsang, Head of Investor Relations at Lument Investment Management]

The company undertakes no obligation to update any of these forward-looking statements. Further, certain non-GAAP financial measures will be discussed on this conference call. A presentation of this information is not intended to be considered in isolation nor as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC.

[Andrew Tsang, Head of Investor Relations at Lument Investment Management]

For the first quarter of 2024, the company reported GAAP net income of $0.11 and distributable earnings of $0.15 per share of common stock, respectively. In March, we also declared a dividend of $0.07 per common stock, common share of stock, with respect to the first quarter. I will now turn the call over to Jim Flynn. Please go ahead.

[James Flynn, CEO at Lument Finance Trust]

Thank you, Andrew. Good morning, everyone. Welcome to the Lument Finance Trust Earnings Call for the First Quarter of 2024. We appreciate everyone joining today. We'll start just as we entered 2024, we were cautiously optimistic the lending environment would begin to improve during the first half of the year. We are now in early May. The Fed has yet to implement any rate cuts, and the economic data suggests inflation has remained stubbornly elevated. The economy and labor market have remained broadly resilient despite the historic increases in short-term rates that began over two years ago.

[James Flynn, CEO at Lument Finance Trust]

Although the Fed has indicated that it did not expect future hikes during its remarks a couple of weeks ago, the consensus view of higher for longer seems prudent until the trend in economic data suggests otherwise. The multifamily sector continued to be challenged during the first quarter, with muted property sales activity leading to limited acquisition financing opportunities. Given the persistence of elevated interest rates, borrowers have also been reluctant to refinance their portfolios unless compelled to do so.

[James Flynn, CEO at Lument Finance Trust]

Just this week, the MBA announced first-quarter lending volume with multifamily down 7% year-over-year in Q1 and down 29% from Q4 of 2023. Despite the challenging short-term environment, nearly $500 billion of multifamily mortgage debt is expected to reach initial maturity by the end of 2025, according to MBA estimates. Combined with a perhaps causing property sales transaction volume to move toward a new normal level activity, we expect to see a return of attractive lending opportunities in the medium and long term.

[James Flynn, CEO at Lument Finance Trust]

Multifamily as an asset class continues to outperform other CRE property types, and we believe this is the reason our company provides its shareholders with a unique value proposition. LFT has a deliberate focus on middle-market multifamily credit, success in active asset management, and strong sponsorship provided by the broader Lument and ORIX platforms. As a result, the company has been able to maintain stable dividends with better-than-average credit performance within its investment portfolio and a superior dividend yield relative to many of our peers.

[James Flynn, CEO at Lument Finance Trust]

Having effectively fully deployed our investable capital in the second half of 2023, our focus this quarter was on proactively managing our portfolio to protect shareholder principal. We successfully resolved the 2.5-rated assets from our December 31st report and maintained a stable weighted average risk rating of 3.5 for the quarter ended March 31st, with no specific reserves recorded during the period.

[James Flynn, CEO at Lument Finance Trust]

We increased our available unrestricted cash quarter-over-quarter, ending Q1 with approximately $65 million compared to $51 million as of December 31st. We believe the increased liquidity will allow us to maintain flexibility in achieving positive asset management outcomes for our shareholders and provide us with the potential to deploy capital into attractive investment opportunities outside of our two existing securitization structures. In the meantime, we have earned relatively attractive returns on our cash deposits given the elevated short-term rates.

[James Flynn, CEO at Lument Finance Trust]

Our portfolio continues to be financed with long-dated secured financing that is not subject to market margin calls. FL1, the CRE CLO we closed back in 2021, is now beyond its reinvestment period and has begun to delever with repayments of its collateral. We continue to explore opportunities to refinance the portfolio.

[James Flynn, CEO at Lument Finance Trust]

As of quarter end, the cost of funds for FL1 was SOFR plus 157 and an effective advance rate of approximately 82%, levels which we believe are still attractive relative to other portfolio financing alternatives available in the market. The LFT financing transaction we executed mid-last year has a remaining reinvestment period that extends into July 2025, and we fully intend to reinvest capital as liquidity within that structure becomes available. With that, I'd like to turn the call over to Jim Briggs, who will provide us details on our financial results. Jim?

[James E. Briggs, CFO at Lument Finance Trust]

Thanks, Jim. Good morning, everyone. Last evening, we filed our quarterly report on Form 10-Q and provided a supplemental investor presentation on our website, which we will be referencing during our remarks. The supplemental investor presentation has been uploaded to the webcast as well for your reference. On pages four through seven of the presentation, you will find key updates and earnings summary for the quarter. For the first quarter of 2024, we reported net income to common stockholders of approximately $5.8 million or $0.11 per share.

[James E. Briggs, CFO at Lument Finance Trust]

We also reported distributable earnings of approximately $7.6 million or $0.15 per share. There are a few items I'd like to highlight regarding the activity during the period. Our Q1 net interest income was $13 million compared to $9.1 million in Q4 of 2023.

[James E. Briggs, CFO at Lument Finance Trust]

The sequential increase was primarily driven by higher exit fee income due to greater quarter-over-quarter payoff activity within the portfolio and $3 million related to the resolution of two defaulted loans, one collateralized by an office property located in Columbus, Ohio, in which we reduced our carrying value to zero, and the other collateralized by a multifamily property located in Virginia Beach, Virginia, which was modified during the quarter with, among other things, previously past due interest being brought current.

[James E. Briggs, CFO at Lument Finance Trust]

Payoffs during Q1 totaled $97 million as compared to $43 million in the prior quarter. Associated Q1 exit fees totaled approximately $825,000 as compared to $210,000 recognized in the prior quarter. The majority of loan payoffs we experienced were driven by borrowers either refinancing with another lender or selling the underlying properties.

[James E. Briggs, CFO at Lument Finance Trust]

As a reminder, when one of our loans are refinanced with a permanent agency loan provided by an affiliate of our manager, the borrower exit fee is waived pursuant to the terms of our management agreement. In these instances, we do, however, receive a credit equal to 50% of the waived exit fees against our reimbursable expenses due to our manager. Our credit for waived exit fees was flat quarter on quarter. Our total operating expenses were $4.3 million in Q1 versus $2.7 million in Q4 of 2023.

[James E. Briggs, CFO at Lument Finance Trust]

The majority of the sequential increase in expenses was driven by the accrual of incentive fees due to our manager, which are accrued and payable on a quarterly basis equal to 20% of the excess of core earnings as defined in our management agreement over an 8% per annum return threshold.

[James E. Briggs, CFO at Lument Finance Trust]

Distributable earnings can be used synonymously with core earnings in this context. Outside of that, operating expenses were largely flat quarter-on-quarter. The primary difference between reported net income and distributable earnings to common was approximately $1.8 million attributable to the increase in our allowance for credit losses, all with respect to our general CECL reserves. Property acquisition volume continues to remain depressed, leading to limited visibility in the market with respect to valuation and cap rates.

[James E. Briggs, CFO at Lument Finance Trust]

The increase in general reserve is reflective of changes in the macroeconomic forecast, including current higher rates for longer sentiment, as well as cautiousness in our modeling as it relates to CRE pricing during this period. As of March 31st, we had two loans risk-rated 5 for default risks. One is a $17 million loan collateralized by a multifamily property in Brooklyn, New York, and risk-rated 5 due to imminent maturity default.

[James E. Briggs, CFO at Lument Finance Trust]

The other asset is a $20 million loan collateralized by two multifamily properties near Augusta, Georgia, but is risk-rated 5 due to monetary default. Both of these loans have been placed on non-accrual status, although both of these loans have since made their April interest payments, which will be recognized in income on a cash basis. We evaluated both of these five-rated loans individually to determine whether asset-specific reserves for credit losses are necessary, and after analysis of the underlying collateral, determined that none were necessary as of March 31st.

[James E. Briggs, CFO at Lument Finance Trust]

As of year-end, the company's total equity was approximately $243 million. Total book value of common stock was approximately $183 million or $3.50 per share, up from $3.46 per share as of year-end. We ended the first quarter with an unrestricted cash balance of $65 million, and our investment capacity throughout two secured financings was effectively fully deployed. We'll now turn the call over to Jim Henson to provide details on the company's investment activity and portfolio performance during the quarter. Jim?

[James Henson, President and General Counsel at Lument Finance Trust]

Thank you, Jim. I will now share a brief summary of the recent activity in our investment portfolio. During the first quarter, LFT experienced $97 million of loan payoffs. A portion of these loan payoffs related to the defaulted loans discussed by Jim Briggs earlier. We did not acquire or fund any new loan assets during the first quarter. As of March 31st, our portfolio consisted of 81 floating-rate loans with an aggregate unpaid principal balance of approximately $1.3 billion. 100% of the portfolio was indexed to one-month SOFR, and 94% of the portfolio was collateralized by multifamily properties.

[James Henson, President and General Counsel at Lument Finance Trust]

An analysis of our net interest income sensitivity to shifts in terms of SOFR appears on page 12 of the earnings supplement. Our investment portfolio continued to perform well during the first quarter, and we ended the period with slightly more than 77% of the loans in portfolio risk-rated A3 or better, marking a slight improvement versus the fourth quarter of 2023. Our weighted risk average rating remained stable at 3.5 sequentially. Our five-rated aggregate loan exposure decreased to approximately $38 million this quarter versus $46 million as of year-end.

[James Henson, President and General Counsel at Lument Finance Trust]

At the time of our last earnings call, we had two five-rated loans that have now been fully resolved. As expected, we received additional insurance proceeds in the amount of $13.5 million on the defaulted loan on the property in Columbus, Ohio, reducing the carrying value of this loan to zero and, after taking into consideration legal and other costs, resulting in the recognition of one-time income of approximately $2.5 million during the first quarter.

[James Henson, President and General Counsel at Lument Finance Trust]

The other five-rated asset at the end of 2023 was a defaulted loan on a multifamily property in Virginia Beach, Virginia. We entered into a loan modification with the borrower and received a $3.6 million partial principal paydown during the first quarter. Last week, the borrower repaid the remaining loan balance in full in accordance with the terms of that loan modification. We are very pleased to have achieved positive asset management outcomes for these loans thanks to the deep experience and diligent efforts of our team. With that, I will pass it back to Jim Flynn for closing remarks and questions.

[James Flynn, CEO at Lument Finance Trust]

Thank you, Jim. Thanks to our attendees and your interest. Operator, please open the call for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by one, and you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please leave the handset before pressing any keys. Our first question comes from the line of Crispin Love from Piper Sandler. Your line is open.

[Crispin Love, Director in Equity Research at Piper Sandler]

Thanks. Good morning. So no new investments in the quarter, but you did have some payoffs. So can you speak to some of the drivers there and expectations going forward in the quarter? Was it lack of opportunities, cautiousness in the market, or anything else you would call out? And then just how would you expect new investments to compare to payoffs in coming quarters? Thanks.

[James Henson, President and General Counsel at Lument Finance Trust]

Thanks,

[James Flynn, CEO at Lument Finance Trust]

Henson. I can take that.

[James Henson, President and General Counsel at Lument Finance Trust]

Yeah, go ahead, sir. Jim, you want that?

[James Flynn, CEO at Lument Finance Trust]

Okay. Yeah. So as noted on the call earlier, FL1, which is our 2021 securitization, is out of its reinvestment period. New investments previously were often reinvestment of that securitization. So right now, we're basically at capacity given that FL1 is out of reinvestment period and the 2023 financing transaction is at capacity. We do have $60+ million of cash. It's just a matter of strategically looking to refinance FL1 and planning with that excess cash accordingly.

[James Flynn, CEO at Lument Finance Trust]

So something to consider over the next couple of quarters as FL1 continues to deleverage. But over the near term, over the next quarter to two quarters, I don't know that we'll see FL1 refinanced, but that'll all be market condition-dependent.

[James Flynn, CEO at Lument Finance Trust]

Right. So the answer is we're effectively fully deployed with, obviously, the elevated cash. So in answer to your question, I would expect to be able to fill any reinvestment capacity that we have in a reasonably unless it's at the very end of the quarter. We'll be able to despite the relatively slow market, there are lending opportunities.

[Crispin Love, Director in Equity Research at Piper Sandler]

Right. Okay. That makes sense. I appreciate that. And then second question for me, can you just give us your views on credit in the portfolio? Provision increased a bit here. Credit metrics were stable, and the resolutions were good to see. But some other competitors have been having tougher experiences as of late. So anything on credit that you're seeing would be helpful. And then why do you think you might be performing better than some of the peers in the space here?

[James Flynn, CEO at Lument Finance Trust]

Well, the honest answer is I think that we've done a very good job of putting together a quality portfolio. And we've had good sponsors who have worked with us to come up with resolutions to challenging situations. And we feel pretty confident and comfortable that we'll continue to be able to do that in the existing portfolio. The structure of our loans have always had rate caps.

[James Flynn, CEO at Lument Finance Trust]

We've had milestones for drawing down new capital in terms of rental increases and actual business plan milestones that have provided opportunities to work with sponsors sometimes sooner in the process than others may have been able to. In general, I think we did a good job on the front end and have a very, very good asset management and portfolio management group that spend a lot of time at the assets and with the sponsors and making sure that we're timely on top of issues. There's not something more secret than that other than I think we have a really good credit team.

[Crispin Love, Director in Equity Research at Piper Sandler]

Great. Thank you, Jim. Appreciate taking my questions.

[James Flynn, CEO at Lument Finance Trust]

Thank you.

[Operator]

Our next question comes from the line of Jason Weaver from JonesTrading. Please go ahead.

[Jason Weaver, Managing Director, Equity Research at Jones Trading]

Hey. Good morning. Thanks for taking my question. First of all, you spoke to this in the last question regarding the wind-down of FL1. I was curious, with how much credit spreads have tightened in the current quarter to date and over the first quarter, if the opportunity is more immediate to pursue that refinancing and where you're seeing generalized spreads out there?

[James Flynn, CEO at Lument Finance Trust]

So, I mean, on the credit side, at 82% and 157 over, there's no opportunity that's really even close to that, whether private or public. But as you point out, as time goes by and we continue to delever, the cost of those funds will increase. You asked immediate. We're evaluating it like we have been and continue to do so, depending on how you define immediate. But we think that there's potential this year or early next year to potentially refinance that. But it's really going to be dependent on the capital markets. Obviously, we can get it done, I think.

[James Flynn, CEO at Lument Finance Trust]

I should say I shouldn't say obvious, but I think you can get a refinance done in the public markets. I think there's other structures with private or non-capital markets transactions that would provide for refinancing. But today, frankly, they're economically not as attractive to pull the trigger, in our opinion. But we're getting closer to that. And we are working with our banking partners who have been thinking of ways we might refinance that portfolio in a way that does make sense, perhaps sooner than later.

[James Flynn, CEO at Lument Finance Trust]

But the short answer is we feel comfortable with the financing today and want to continue to take advantage of the relative cost of capital and, frankly, higher leverage than we might otherwise achieve outside of or in a new deal. But it is something we're going to be continuing to do every month, look at the market, look at what we can get, and compare long-term what we're doing. And I'll also note, I mean, we've said this. I mentioned the $500 billion of maturities coming up. We're already almost halfway through 2024.

[James Flynn, CEO at Lument Finance Trust]

So that number has probably been pushed into 25 already with extensions. We just don't have that data in the market yet. So the opportunity is coming. We're already seeing more for sure, but it's nowhere near where it's been a couple of years ago. So that's also a consideration just in terms of taking advantage of refinancing and creating more capacity. We want to make sure that we have attractive investment opportunities at that time as well. So that's part of the equation as well. So not a direct answer, but that's our thought process. And we talk about it internally and with the board every time we meet.

[Jason Weaver, Managing Director, Equity Research at Jones Trading]

No, that's still very helpful. I was also curious, with the liquidity build that you've seen to date and taking your answer into account with what you're likely to see on more repayments, any change in your posture towards how you're thinking about possible share repurchases?

[James Flynn, CEO at Lument Finance Trust]

Look, it's been on the table with the board. I mean, there's obviously a number of issues, right, the size of the flow being a big one. It's certainly something we consider. But it's weighing the benefits of liquidity, future investment capacity, and the immediate kind of benefit to shareholders and how that might impact the long-term value.

[Jason Weaver, Managing Director, Equity Research at Jones Trading]

Okay. Thank you very much for taking my questions.

[Operator]

Our next question comes from the line of Stephen Laws from Raymond James. Please go ahead.

[Stephen Laws, Equity Research Analyst at Raymond James]

Hi. Good morning. Nice start to the year. Good number out of the gate. I know nice to get the 2 5-rated loans resolved. Can you touch on the resolution path for the new 5-rated loans? I know you said both paid April, no specific reserves, so good updates there. But can you talk about timing or resolution path on those, I guess, two loans but three assets?

[James Flynn, CEO at Lument Finance Trust]

Yeah, exactly. Do you want to weigh in on it?

[Stephen Laws, Equity Research Analyst at Raymond James]

Yeah.

[James Flynn, CEO at Lument Finance Trust]

Yeah. I mean, I think that is a very real-time conversation. I don't think we're prepared to share the exact resolution path at present. But just like what you've seen from us in the past, this involves hands-on active management, negotiations with the sponsors, and a push towards quick resolutions.

[Stephen Laws, Equity Research Analyst at Raymond James]

Okay. And then to circle back to the CLOs, I guess, or FL1 specifically, looking at Q4, that spread was 155 and only increased even with $70-some-odd million of repays to 157. Can you help me with the math there or how I think about that going forward? Is it a pro-rata pay structure in some way? Or I was a little surprised with that level of prepays that that financing cost didn't increase by more than two basis points sequentially.

[James Flynn, CEO at Lument Finance Trust]

Yeah. I mean, what I'd say is that the 2021 securitizations with the big AAA and then pretty flat spreads down the stack, meaning that this isn't a 600-basis-point BBB spread. I don't have exactly offhand where the BBB is, but I want to say it's in the 300s. You're only seeing a marginal increase in spread from that AAA paying down. It is the AAA paying down.

[James Flynn, CEO at Lument Finance Trust]

It's not the pro-rata of the other tranches. It's just mechanically what the number is. It will shift up as the AAA continues to pay down, but not excessively. Frankly, the larger issue there is just the deleveraging, right, the fact that you have less debt on your equity. And that will be the primary driver of the need to refinance ultimately.

[Stephen Laws, Equity Research Analyst at Raymond James]

Okay. Appreciate that. Yeah. And its size. It's a bigger securitization than the other ones. So that certainly impacts the small it will. And it's the BBBs. The BBBs that tied, it probably stays pretty attractive for some time. I guess to think about incorporating other financing structures you mentioned, I mean, would you look at bank lines and along those lines, where are spreads on new investments for what you see as you look at opportunities?

[Stephen Laws, Equity Research Analyst at Raymond James]

And how do those spreads compare with what banks are charging these days? If you were to go that route and kind of considering the lower advance rate on those facilities, what would a fully levered ROE look like if you chose a path like that to open up the growth opportunity?

[James Flynn, CEO at Lument Finance Trust]

Well, I think there's two questions there or two answers. One is the refinancing of the, if we were to refinance FL1 with a term-out bank line, just kind of, I think, how you're asking, that spread and that leverage would be negotiated. And I don't think it would certainly be related and correlated to a market, but it wouldn't be the same as a new warehouse, say. Those spreads, so new asset spreads are a wide range because the credit is a wide range.

[James Flynn, CEO at Lument Finance Trust]

You have high-quality new construction deals that are coming out of construction into lease-up at relatively low leverage pricing in the mid to high 200s, low 300s, depending on where and what. You have extended business plans for bridge loans that have taken longer and are maybe getting recapped with a new sponsor or same sponsor for an extra couple of years that are probably more in the 300s. Then you probably have some, and then you could go into the maybe higher leverage, different markets above that, which we're not typically seeing too much.

[James Flynn, CEO at Lument Finance Trust]

But those are, so the asset spreads, we're trying to balance some of the credit risk versus the return, obviously, as we've done. So we'll have a balance of those opportunities. And I think warehouse and bank spreads, when you're thinking about what those look like in the market, which we don't have at LFT, but the sponsor, obviously, we do, those credit spreads and leverage relate to the assets I just said.

[James Flynn, CEO at Lument Finance Trust]

So you have, I'd say, in the high 100s-low 200s for new deals, newly originated deals, and leverage 70%-75% is pretty market, I would say. I don't know if Zach or Andrew or anyone, if you guys have more to add there, but I think that's about where things are.

[Stephen Laws, Equity Research Analyst at Raymond James]

Yeah. That's spot on. Yeah. Well, that's great color. I really appreciate you walking through those numbers for me. Appreciate it. Thanks for the comments this morning.

[Operator]

Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann. Please go ahead.

[Christopher Nolan, SVP at Ladenburg Thalmann]

Thanks for taking my questions. The Brooklyn Non-Accrual, is that a rent-stabilized building?

[James Flynn, CEO at Lument Finance Trust]

Zach, you have the exact answer. I'm sure there's some. I'd have to check on it.

[Zachary Halpern, Managing Director at Lument Finance Trust]

Right. It's primarily market rate.

[Christopher Nolan, SVP at Ladenburg Thalmann]

Okay. So I'm just.

[James Flynn, CEO at Lument Finance Trust]

To be clear on that deal, there's no yeah. I mean, I'll state unafraidly that that is not an issue. Value is not an issue on that one. We'll say that.

[Christopher Nolan, SVP at Ladenburg Thalmann]

Okay. And then for the loan portfolio in general, do you have any interest-only loans?

[James Flynn, CEO at Lument Finance Trust]

Well, they're all, yeah. I mean, for the floating-rate stuff, it's all interest-only, which is the portfolio. I mean, the bridge portfolio is interest-only. There are rebalancing requirements that would require principal paydowns, and those exist in all of the funds.

[Christopher Nolan, SVP at Ladenburg Thalmann]

Okay. And then in the final question, I'm just.

[James Flynn, CEO at Lument Finance Trust]

This is a recap of what these underlying bridge loans are. Typically, they're two or three-year terms, floating rate and interest-only. They do have interest rate caps, which are purchased by the sponsors. But bridges, primarily, whether it's us or competitors in the space, they are interest-only loans.

[Christopher Nolan, SVP at Ladenburg Thalmann]

I guess given that, how does that affect your reserving methodology just because these borrowers sort of have a larger balloon payment at the end than normally?

[James Flynn, CEO at Lument Finance Trust]

So, I mean, I'll let Jim Briggs speak to the process. But just in general, I mean, so when we do an asset-by-asset analysis of our portfolio, from my perspective, and there's an actual process, but the key metric we're looking at to start is what's our basis, our loan-to-value. And so that's a primary driver. So in some cases, we obviously have assets that maybe started at a 70 as-is LTV. It might be 75-80 today. And that's not good, that means the equity has lost value, but our credit position is pretty good. So that's where we're kind of evaluating and then, obviously, looking at the market and the comps.

[James Flynn, CEO at Lument Finance Trust]

So we're doing a true asset-by-asset analysis on whether we think there's an impairment or risk of loss. On the general reserves, on the CECL side, that is a more macro-market-driven analysis. That is less focused on the specifics of our portfolio and more focused on industry and macro trends. Jim, I don't know if we've generally taken we think a fairly conservative approach.

[James E. Briggs, CFO at Lument Finance Trust]

Yeah. I mean, it's going to be a combination of both. CECL requires a look forward on what the macro environment and the forecast is going to be. We choose a one-year period for that. But to Jim's point on collateral value and LTVs, that is a big driver as well. And you're seeing that in our general reserve, right? I talked about our general cautiousness in this period as we model where there's not a lot of activity getting done and the observability of cap rates and valuation. That's sort of speaking to LTVs, right, and collateral value. So the same drivers that Jim talks about is going to be a big driver of the reserve.

[James E. Briggs, CFO at Lument Finance Trust]

There is going to be this macroeconomic look as well because it's expected losses over life. And we need to be forecasting. We saw that macro for us, that macro forecast move to more of a, "We're not going to see rate cuts as soon as we thought we were going to. And they're going to come later in the year, potentially." So it's a combination of both, but I would say that LTV is going to be a driver there and was a driver of the reserve.

[Stephen Laws, Equity Research Analyst at Raymond James]

Okay. Thank you.

[Operator]

Again, as a reminder, if you wish to ask a question, please press star one. Thank you. Our next question comes from the line of Ward Blum from UBS. Please go ahead.

[Ward Blum, Member, Board of Director at Lument Finance Trust]

Good morning. Good report. The recoveries on the commercial building, I guess, to me, sort of look like an extraordinary gain. If we strip out that gain, what do distributable income per share numbers look like?

[James Flynn, CEO at Lument Finance Trust]

Those one-timers work out to be about $0.06 for the one-timers. And I spoke about the incentive fee. So that's sort of going the other way for about.

Participants

Executives

• James E. Briggs, CFO
• James Flynn, CEO
• James Henson, President and General Counsel
• Ward Blum, Member, Board of Director
• Zachary Halpern, Managing Director

Analysts

• Andrew Tsang, Head of Investor Relations at Lument Investment Management
• Christopher Nolan, SVP at Ladenburg Thalmann
• Crispin Love, Director in Equity Research at Piper Sandler
• Jason Weaver, Managing Director, Equity Research at Jones Trading
• Stephen Laws, Equity Research Analyst at Raymond James